Master Credit Plan of the Global Elite

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–At last. A prediction of the world’s economic future that is as bombastic and grandiose on the positive side as your editor’s is on the negative side. Investment and urbanisation are the twin engines that will drive global GDP from $62 trillion last year to $143 trillion by 2030, according to Gerard Lyons at London’s Standard Chartered.

–This is the superest of “super cycles.” Lyons reckons it will be only the third time in human history you’ve had a chance to invest in the kind of synchronised global growth spurt that lifts all the world’s boats—big and small—on the rising tide of prosperity. He says the first such super-cycle included the four decades before World War One. The second super-cycle included the three decades after World War Two.

–This position is going to get a lot of air time at the upcoming World Economic Forum in Davos, Switzerland. That’s where the smartest, best-dressed, most loquacious people in the world will meet in April of this year to discuss how much better the world is getting. And if you’re one of the underwriters of globalisation or a firm that’s taken advantage of the globalisation of labour, the world HAS been getting better and better.

–But here is a question: how were those two previous super-cycles of global growth different? The answer? One was based on sound money, free trade, and occurred in a world with relatively low personal and corporate taxation (there was no income tax in fact), and governed by the Rule of Law (instead of the corporatist welfare/warfare State we now suffer under).

–The other “super cycle” was what we’d call the “Keynesian super cycle.” It had one attribute in common with the previous cycle, namely the whole world used the same monetary standard. In the 19th century it was the gold standard. In the 20th, it was the U.S. dollar standard.

–But the post-World-War-Two cycle was not really the product of growing, non-coercive global trade. It was the product of shattered economies having to rebuild and reindustrialise (Germany and Japan). The U.S. enjoyed unrivalled supremacy on global markets because its industrial machine was undestroyed and consumer credit released years of pent-up war-time demand.

–If the Davos crowd is right, you can expect to see two massive trends. The first will be a $100 trillion credit boom to finance the Third Super Cycle.  “Credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential,” write the people who apparently missed the fact that we just had a disastrous credit boom.

–But let’s assume the trans-national global elites are right on this one. If they are, you should probably buy coal, copper, oil, and energy, or the companies that explore, find, and produce them. So looking on the bright side for Australian investors, all you have to do if the Davos crowd is right is…well nothing. Just sit back and get rich!

–BHP, Rio Tinto, Santos, Woodside…these companies will reap a profit harvest of biblical proportions in the coming Third Super Cycle. If steel prices are set to rise by 66% this year alone, then the Pilbara will be to Aussie investors as Ghawar has been to the House of Saud.

Every man a Pharaoh!

–But what if “credit” isn’t the lifeblood of the economy? What if “credit” is the lifeblood of zombie economies, where real resources are misallocated to uneconomic projects? What if credit accelerates the depletion of scarce resources based on fictitious demand? And what if new credit is just a transparent attempt to recapitalise the global financial system with a new kind of global currency?

–Well, that’s a lot of what ifs. Who knows what the world will be like in 20 days, much less twenty years?  But here’s a prediction for the Davos set: your plans to unleash a Third Super Cycle of global growth based on $100 trillion in trans-national credit growth are going to fail spectacularly. Tomorrow, how it will happen.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. You’re wrong on this one, Dan. Credit is not evil; excess credit is. The reconstruction and reindustrialisation of post-war Japan and Germany is akin to the urbanisation of the developing world. The greenback standard – USD being an instrument of credit itself – is the consequence of that. A lot of credit ($100t) will be needed for it, and we sure are going through a global credit contraction. But, the contraction is less severe than it seems, as liquidity is actually shifting, not just receding. Check out the list of the 10 wealthiest people in the world again. Two are Latin American and Two are Indian. Guess what they’re invested in.

    Wisdom Tooth
    January 24, 2011
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  2. Do you think a gold standard would have stopped the 1980’s Japan real estate bubble?

    Don’t you think that envy at what the Japanese external asset acquiring priviledged elite could make of that bubble (based on home inflated real estate asset prices, multi generational loans and b/s bank and personal balance sheets full of golf memberships) had anything to do with the birth of funny money?

    A gold standard would have done zip because with the Japanese national savings bias and the only believers they needed were those at home in Japan. Gold doesn’t make sound money, the issue is leverage and bodgy balance and betting that both flies are going to climb the wall and it matters only marginally onm main street who gets there first (but not to the hyper leveraged financial engineers in their peer groups).

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  3. The problem with the master plan for continued exponential growth, is that it is impossible. The real driving factor for the past couple centuries, has been energy and raw materials.
    Unless the Masters have discovered infinite sources of both, the game’s almost over.

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  4. Ross, you should have a look at FOFOA. Do a google.

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  5. @Pete. did the google. First let me explain my position on gold. Pure supply and demand should rule in my view. Don’t care how high it goes as long as there is no excessive leverage in the positions … buyer beware. The gold standard is another thing. As long as massive market moving bubbles can exist alongside a gold standard there is no attraction for me in that standard as a cure all. If gold isn’t a cure all then lets talk about the real problem … the quality of collateral that is mutton dressed as lamb, the quality of balance sheets, and the excessive leverage. If gold really worked as a standard I would go with it despite the idolatory and the logistical nightmare.

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  6. * Ron Hera, Interview: Jim Rogers on Currencies and Inflation, 321gold.com, June 4, 2010:

    HRN: Would you advocate a commodity-backed reserve currency instead?

    Jim Rogers: Reserve currencies can be anything that you want. The problem with paper money is that it’s easy to debase and abuse. As I said, the US is the largest debtor nation in the history of the world. They keep printing the stuff. The UK, once upon a time, had the world reserve currency. They abused it mightily. Eventually the world just said “no, we’re not going to take sterling anymore” and rightly so. So, in my view, that’s the problem with paper money. Now, gold has its own problems too. Gold didn’t survive very long either as the world reserve currency since politicians kept changing the rules. Unfortunately, politicians know how to abuse and destroy. One can think of various and sundry solutions. My only worry is that, no matter what mankind has come up with in the past, politicians have always found a way to abuse it and debase it.

    HRN: Do you think a return to the gold standard would constrain government abuse?

    Jim Rogers: Well, it never has. The Romans had precious metals as their currency and do you know the term “debase”? The Roman politicians had the brilliant idea that if a coin was 100% pure precious metal, they could slip a little base metal in and, over a couple of hundred years, they went from 100% pure precious metal to almost 0%. That’s where the term “debase” comes from. So, we’ve tried it.

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  7. I agree with AlanR. You have two diverging and contradictory systems – this has always been the case with capitalism. One ‘system’ is bound by constraints – that is a finite stock of available resources, technology know how, etc. While the other is driven by infinite debt creation in anticipation of continued unconstrained growth. The outcome will be the emergence of multiple asset bubbles and the potential for systemic collapse.

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  8. There is mostly a convergence of views here so let me mess that all up in the anarchist tradition from Joel’s story today even while taking a pro statist line.

    As far as the global reserve currency or backing of paper money goes it seems to me that most solutions will in the end be gamed by in those charged with human ingenuity and avarice.

    All we are looking for is transparency to moderate paper’s worth but whenever you see a system like the CPI basket (transparency of inflation’s worth) you know it has been gamed by its creators before it hits the deck.

    All the while we come back to inevitable corruption among political elites and that leads to the concept of moderation through reserve powers or supposed cleansing through standing army led war (industrial production + innovation + resolve + resource alliances = victory). Or in the case of the christians in the catacombs just innovation and resolve.

    If it wasn’t for the poor record of the magisterium you might look back there if the reserve power was confined to something as narrow as money but hey Reserve Bankers are already doing God’s work right? And we all should be more interested in what is happening under the Iranian system where the mullahs use their half of the reserve power voting bloc for moderation. Lately, especially after their recent about face on subsidies, I would vote for the idea that the mullahs would hold the line economically over the Rockefeller Trilateral-Bilderbergers and the academia-reserve banking estate that is currently exercising reserve power “moderation” any time.

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